Goldman strategist Matt Ross noted in the last downturn after the GFC corporate Australia was “conservative” in writing down assets by $150bn from 2010 to 2016, which amounted to 16 per cent of normalised earnings.
Investors don’t take much notice of non-cash writedowns, but on Ross’s reckoning in the six years to 2016 companies impaired assets totalling $77bn, which lowered depreciation charges by 4 per cent and inflated earnings per share by 4 per cent.
KPMG’s Gary Wingrove warned on the weekend that balance sheet risks were a key issue for the earnings season and he was hoping companies would write down asset values to fair market value.
This is particularly the case in sectors like transport, the airports and the like which are not worth what they were a year ago.
Auditors might like some conservatism on the balance sheet but the tactic is also a good way of managing earnings going forward.
The 2020 financial year by all accounts would have been a miserable one for executive pay, so given bonuses were not to be seen, management might as well write down assets to ensure there is some real kick in earnings going forward.
Citi is tipping a 37 per cent fall in dividends from $72bn to $45bn, so stakeholder management will be another focus of earnings season, with companies wearing their ESG badges loudly and proudly, supporting customers and staff with shareholders taking a back seat.
Profit season is also a good time to raise extra capital, adding to the $27.7bn raised in the COVID-19 era, with investment banks led by Macquarie and Goldman collecting $447m in pocket money along the way.
The market is trading at 19 times earnings and 28 times industrial company earnings, which is a little toppy, but heading to the 2022 financial year, which is seen as the more normal benchmark, the ratios are 17 times and 24 times respectively.
CBA collaborates
Jefferies is thinking CBA will report a profit of around $7.9bn for the last financial year, which puts some context around the $28m the bank will invest with Paul Bassat’s Square Peg and Ash Fontana’s Zetta.
CBA’s Matt Comyn has gone out of his way to open CBA technology to outside ventures, which is a welcome collaboration, and his deal with Bassat will be more of a partnership between the two.
Last year Comyn set up x15 with Microsoft and KPMG to look at fintech investments like the $US300m poured into Sweden’s buy now, pay later firm Klarna.
CBA earns over half its profits from home loans but this franchise is potentially under threat from technology, so while none of the ventures today will shift the dial at the bank they are an investment in the future, some fun on the side and an excuse to join the Australian corporate tourists in Silicon Valley.
BNPL may be a stockmarket darling but the latest official payments figures show it accounts for just $6bn out of $1.1 trillion compared to $340bn for debit cards — so it hardly rates a mention in the total.
The sector has been going for five years, so all that growth should be put in context. In the US it amounts to just 0.04 per cent.
Gunning for Google
The ACCC and antitrust regulators around the world are gunning for Google, but what is the endgame, short of forcing them to divest assets, which arguably is too late?
The question comes in the wake of the ACCC’s latest misleading behaviour case against Google over its tracing of consumer behaviour on websites. The ACCC’s Rod Sims says the aim of the litigation is to set boundaries, but what is the court going to tell Google — don’t follow people on the internet, or make sure you put out better disclosure statements so people understand you are following them?
The question is whether either of the above will make any difference to Google. The more people understand the value Google gets from using your data the more concerned they will become.
It’s a work in progress.
Which brings up the media code of conduct due out this week, detailing just how news organisations can be compensated for their material.
Google has several points on this issue, starting with the claim it only makes $10m a year from use of news content. It says that each year it transfers $218m in value back to the news organisations through searches directed to their websites, and finally, only 1.25 per cent of all searches are directly related to news.
The transfer-back being when you search for an article you get referred back to the newspaper’s website. Google claims this as revenue it is transferring back to the paper, which is a stretch, and of course it controls the customer, not the paper. Google says the impact news content has on its business is minimal, which is a claim that could only be tested if you removed all news content from its searches and other data vehicles like DoubleClick.
The indirect revenues collected from news are considerably bigger than the direct fees claimed by Google.
There are statistics and statistics, depending on what case you want to present.
In the old days of classified advertising weekend papers were full of them and they provided plenty of money for the media companies, but then arguably people only came to the paper to read the news.
The ACCC code will address just how news organisations will be compensated.
News Corp wants a final offer arbitration, which says if Google says the compensation is $10m and News says $100m then the ACCC will choose one or the other and not an in-between number.
The idea of this suggestion is that Google knows better than most how to tie up debates in courts for years, so better to have a 12 month fee set from the beginning which can’t be complicated.
Then, next time around, both sides will be more realistic in their negotiating.
Back in 2007 when Google acquired DoubleClick to give it access to consumer website searches few outside the company realised the enormous commercial boost it would get.
Everyone does today, because DoubleClick has moved from being a new technology company into being part of an advertising behemoth controlling digital advertisements.
That’s the challenge with competition law.
The ACCC comes to the table with one benefit: having its consumer powers and competition powers as all part of the same armoury.
It is one of the few in the world to possess both and they are being employed in the battle with Mel Silva’s team at Google Australia.
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